The PAC report, published today, criticised the “inappropriate” decision to use PFI for the MoD’s air-to-air refuelling needs and passenger transport.

PAC chairwoman Margaret Hodge said using PFI to procure the Future Strategic Tanker Aircraft (FSTA) project has “not secured value for money”. She also condemned “the department’s failure to conduct a robust evaluation of alternatives, a failure which should have been challenged by the Treasury".

The MoD signed a PFI contract with AirTanker in 2008 for FSTA to provide air-to-air refuelling and passenger transport based on 14 modified Airbus A330s replacing the RAF’s current fleet of 24 Tristars and VC10s. Under the contract, worth £10.5 billion over 27 years, AirTanker owns the aircraft but will provide them to the department as well as aircraft maintenance and infrastructure.

The PAC expressed “great concern” that the MoD took more than nine years to negotiate the PFI contract, causing delays that led to “considerable cost increases against initial estimates”.

Hodge spoke of “significant shortcomings in the department’s procurement of FSTA”.

These include: assuming that PFI would be the right solution without a sound evaluation of alternatives; running only a limited competition; failing to obtain sub-contractor cost data resulting in the MoD’s inability to determine whether AirTanker’s offer was good value for money; not having the right skills and experience and not providing firm leadership to manage the purchase.

It said the MoD recognised too late that the new aircraft must be able to fly into high threat environments such as Afghanistan and still has not decided whether to fit the necessary protective equipment. Such a specification change would result in higher cost implications, but until the MoD does this, the existing Tristar fleet must continue flying personnel to Afghanistan until 2016.

Hodge added: “Throughout the project the MoD has lacked the robust financial and performance data needed to make sensible decisions. In this respect, FSTA is illustrative of a wider problem for the department which fundamentally affects its ability to deliver value for money.”